High Yield Oil & Gas Equity Appreciation Has Stalled YTD

by: Zvi Bar
In April I identified six oil & gas equities that had lofty yields of at least 7%. These companies have been popular options for both yield-hungry income investors and those wanting exposure to the energy-based commodities that these companies provide. The group appreciated between about 15% and 55% over the last year, all while providing yields that are now between 7.7% and 9.2%.

The companies are:

Breitburn Energy Partners L.P. (BBEP) (8.3%)
Calumet Specialty Products Partners LP (NASDAQ:CLMT) (9%)
Encore Energy Partners LP (NYSE:ENP) (9.2)
Ferrellgas Partners LP (NYSE:FGP) (8%)
Martin Midstream Partners LP (NASDAQ:MMLP) (7.7%)
MV Oil Trust (NYSE:MVO) (8.2%)

As impressive as that performance is, this group has stalled within 2011. To illustrate this, each of the six companies was up approximately the same amount at the start of the year, where the group was up between 11% and 55%.

Compare the 1 year chart results:
Click on images to enlarge
To the charts from 1 year ago until the start of 2011:
Alternatively four of the six oil & gas equities have lost share value since the start of the year, with the members of the group returning between about -5% and 1% over the period, as shown below
The group’s activity over this year that started with several oil price catalysts has been surprising. Given the increased risk to global oil supply access and increased inflation concerns, one would expect oil prices to increase. The fact that they have maintained a range since the start of 2011 indicates many individuals believe we are at or near peak oil prices, and that supply and demand will maintain about that price or less.
While over the long term it is unlikely that oil or any commodity can be capped in price, temporary price cycles for individual commodities or types can reach levels where a temporary correction is in order. This recent delay may be that temporary correction, although it may also be the start of a larger short-term correction to the price of oil. Fears have emerged over European financial risks and potential Asian emerging market recessions that could reduce oil & gas demand.
With the substantial move upward in oil price from the $30s to over $100 a barrel, some downtrends are probable, even if oil is likely to appreciate further over time. Such a correction would indicate that a fiduciary might reasonably consider an investment in such equities to be both a value (appreciation) and income allocation with significantly lower short-term risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Yield is but one factor in choosing a proper investment. Potential trust investments should be considered on their own merit and relative to the total portfolio of investments.

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